Viet Nam The economy is weathering the global economic crisis relatively well due largely to swift and strong policy responses. The GDP growth forecast for 2009 is revised up from that made in March and the 2010 forecast is maintained, with growth expected to accelerate in the second half of 2009 and into 2010. The projections for inflation are raised, chiefly because of higher world commodity prices. Forecasts for current account deficits are narrowed, though the overall balance of payments is still expected to be in deficit this year, before it returns to surplus next year. Therefore, the Government needs to strike a balance between stimulating growth through demand-side measures and safeguarding macroeconomic stability. Updated assessment Despite the weak external environment, the economy has continued expanding this year, albeit at a slower rate. GDP grew by 3.9% in the first half of 2009, as against 6.2% in 2008 and more than 8% in 2005–2007 3.10.1 GDP growth by sector (Figure 3.10.1). Expansionary fiscal and monetary policies boosted public GDP Agriculture Industry Services consumption and domestically financed investment. Imports fell more % steeply than exports, so that net exports contributed to GDP growth. At the 12 same time, a rise in unemployment and fall in remittance inflows damped 9 growth of private consumption, and a downturn in inflows of foreign direct 6 investment (FDI) caused a decline in foreign-financed investment. 3 Viet Nam’s economic slowdown appears to have bottomed out early 0 in 2009, with year-on-year GDP growth quickening to an estimated 4.5% 2005 06 07 08 H1 09 in the second quarter from 3.1% in the first. Growth of agriculture pulled Source: General Statistics Office of Viet Nam. Click here for figure data back sharply in the first quarter because of bad weather, but rebounded in the second quarter, aided by a bountiful winter–spring rice harvest. Manufacturing, which contracted in the first quarter on account of weak external demand, started growing again in the second, as expansionary monetary and fiscal policies strengthened domestic demand. Growth of services and construction accelerated in the second quarter owing to a pickup in private consumption and domestically financed investment. 3.10.2 Crude oil output Crude oil output Following several years of decline, output of crude oil grew by 17.9% in Million metric tons 20 the first half of 2009 (Figure 3.10.2). Falling output at some old fields was more than offset by increases at new fields. 15 A softening in the labor market that started in late 2008 continued 10 in early 2009, as economic activity slowed and businesses shed labor. 5 Although most layoffs occurred in urban areas, unemployment and 0 underemployment increased in both urban and rural areas, as some of 2005 06 07 08 H1 08 H1 09 Source: General Statistics Office of Viet Nam. those from villages who had lost their jobs in cities returned home. Declines Click here for figure data in remittance receipts and wages pushed some households into poverty. Toward mid-2009, however, demand for labor appeared to pick up again. Inflation has decelerated sharply owing to lower world commodity prices and relatively slow domestic economic growth. Period-average This chapter was written by Bahodir Ganiev of the Viet Nam Resident Mission, ADB, Hanoi. 162 Asian Development Outlook 2009 Update inflation eased to 8.3% in January–August 2009 from 23.0% in 2008. Year- 3.10.3 Inflation on-year inflation fell to 2.0% in August 2009 from 28.3% in August 2008 Period-averagea inﬂation Year-on-year inﬂation (Figure 3.10.3). However, inflation pressures reemerged in the second quarter Seasonally adjusted monthly inﬂation as commodity prices edged up and growth accelerated. Seasonally adjusted % % month-on-month inflation rose to 0.8% in the June–July period, a fairly 30 6 high rate given that world commodity prices were well below their peaks. 20 4 To stimulate economic activity and limit the rise in unemployment, 10 2 the State Bank of Viet Nam (SBV), the central bank, eased monetary 0 0 policy significantly in late 2008 and early 2009 and has kept it relatively -10 -2 loose since then. Year-on-year growth of reserve money quickened from Jan Apr Jul Oct Jan Apr Jul 2008 09 13.7% in the third quarter of 2008 to 26.7% in the first quarter of 2009, a Year-to-date average. before a decline in SBV’s foreign assets pulled it back to 21.2% in the Sources: General Statistics Office of Viet Nam; staff second quarter (Figure 3.10.4). Spurred by the introduction of government estimates. Click here for figure data interest rate subsidies, growth of credit and money supply accelerated in the first half of 2009; in particular, growth of total liquidity (M2) stepped up to 35.8% in the second quarter from 20.3% in the fourth quarter of 2008. Since the easing of monetary policy was not enough to prevent a sharp slowdown in growth, the Government approved several fiscal stimulus measures in the first half of 2009 (Box 3.10.1). They include a temporary 30% cut in the corporate tax rate for small and medium-sized enterprises, additional financial assistance to poor households, a 4 percentage point 3.10.4 Growth of money and banking interest rate subsidy on certain bank loans, and a boost in planned indicators Total liquidity (M2) infrastructure spending. The total cost of these measures is estimated at Reserve money D145.6 trillion, more than was expected when Asian Development Outlook Banking system net domestic credit 2009 (ADO 2009) was launched in March this year. % 80 The tax breaks, coupled with a fall in oil income caused by lower 60 world oil prices, reduced budget revenue and grants in the first half of 40 2009 (Figure 3.10.5). Budget expenditure decreased as well, because the fiscal stimulus mainly increased off-budget spending and lending. The 20 budget fell into deficit, from a surplus a year earlier. The overall fiscal 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 deficit (including off-budget expenditure and lending) was likely much 2007 08 09 larger than the budget deficit. Sources: State Bank of Viet Nam; staff estimates. SBV has kept its reference foreign-exchange rate fairly stable since Click here for figure data December 2008 (Figure 3.10.6). Declines in exports as well as in remittance and foreign capital inflows have reduced the supply of foreign exchange, while expansionary monetary and fiscal policies have increased demand for it. Consequently, there has been a shortage of foreign exchange in the formal market and the dong’s exchange rate against the US dollar has 3.10.5 Government finance remained at the upper bound of its trading band since October 2008. Budget revenue and grantsa Budget expenditureb The band was widened to +/-5% from +/-3% around SBV’s reference rate % of GDP in March 2009, resulting in depreciation against the US dollar by about 35 2% in the formal market. However, this depreciation was insufficient for 28 the market to clear. The black market exchange rate has stayed above the 21 upper bound of the trading band most of the time since October 2008. 14 The shortage of foreign exchange in the formal market has helped 7 narrow the trade deficit by suppressing imports. But it has also created 0 2005 06 07 08 H1 08 H1 09 difficulties for businesses, given rise to indirect payments for foreign a Excludes revenue carried over from the previous year. exchange in the formal market, and hurt the business environment. b Excludes amortization of public debt and expenditure brought forward from the following year. Furthermore, the shortage has fueled expectations of devaluation and Sources: Ministry of Finance and General Statistics Office of put depreciation pressure on the dong in the black market. The spread Viet Nam; staff estimates. between SBV’s reference rate and the black market rate widened to more Click here for figure data Southeast Asia Viet Nam 163 3.10.1 Fiscal stimulus measures and the 2009 budget The Government approved various fiscal stimulus measures to 2010 and the bringing forward of some expenditure from in January–May 2009 to ease the impact on the economy 2010 to 2009. of the global economic slump. Given the consensus-based In June 2009, the National Assembly lowered the official decision making system, it approved policies in a piecemeal GDP growth target for 2009 from 6.5% to 5.0% and raised fashion to speed their implementation, rather than wait to the ceiling on the budget deficit (based on the Government’s get agreement on a package of measures. definition) from 4.8% of GDP to 7.0% of GDP (Box table This approach enabled the Government to start carrying 2). This in effect increased the planned overall fiscal deficit out some stimulus measures as early as February. However, (including net off-budget expenditure and lending) from it also created some uncertainty about the impact of 6.9% to 15.7% of GDP. However, the Government’s revised the stimulus on the budget, and the total amount raised budget plan is based on conservative projections of world oil questions about the implications for macroeconomic prices and revenue performance. Actual revenue is likely to stability and sustainability of public debt. exceed the planned amount owing to higher world oil prices The total amount is indeed large, estimated at and improved tax administration. D145.6 trillion, or 8.7% of projected 2009 GDP (Box table 1). However, the direct impact on the 2009 2 Budget, % of GDP, 2009 budget will be less than this amount, even if all measures Government’s plan ADB are fully carried out. This is because the measures include revised Original Revised housing assistance to the poor that will be mostly financed projections by the Viet Nam Bank for Social Policies and interest rate Budget revenue and grants 21.5 20.0 22.8 subsidies that will be partly disbursed in 2010. Budget expenditure 25.2 27.2 27.6 Budget fiscal balance -4.8 -7.0 -4.5 (Government's definition)a 1 Fiscal stimulus measures, trillion dong, 2009 Off-budget expenditure and 3.2 8.5 5.3 Amounta Potential direct impact lending (net) on the budgetb Overall fiscal balanceb -6.9 -15.7 -10.1 2009 2010 ADB = Asian Development Bank. a Includes carried over 2008 revenue (as revenue) and amortization of public Measures affecting 28.0 -28.0 9.2 government revenue debt (as expenditure). b Excludes carried over 2008 revenue and amortization Measures affecting government 117.6 114.5 -24.7 of public debt but includes net off-budget expenditure and lending. expenditure and net lending Source: Government of Viet Nam; staff estimates. Total 145.6 -141.5 33.9 Billion US dollars 8.6 -8.3 1.8 In addition, planned capital spending is unlikely to % of GDP 8.7 -8.5 1.8 be fully disbursed due to implementation and financing a Excludes quasi-fiscal stimulus measures undertaken through the Viet Nam constraints. Accordingly, the ADO 2009 forecast of the Development Bank (such as guaranteeing bank loans to small and medium- overall fiscal deficit in 2009 is revised up only slightly, sized enterprises). b Staff estimates based on the assumption that the announced fiscal stimulus measures will be fully implemented. Excludes from 9.8% of GDP to 10.1% of GDP. The gap is expected the indirect impact of the measures on the budget through their effects on to be financed mainly by drawdowns on the Government’s public debt, growth, etc. deposits at SBV and at commercial banks, and by borrowing Source: Government of Viet Nam; staff estimates. from multilateral and bilateral development agencies. The fiscal deficit is therefore unlikely to put sustainability The potential direct impact of the measures on the 2010 of public debt at risk. Nor is it expected to jeopardize budget is positive, given that they include both deferment of macroeconomic stability, assuming that SBV starts some tax payments and budget loan repayments from 2009 tightening monetary policy toward the end of 2009. than 9% in mid-July 2009 from about 3% at end-2008. SBV increased the supply of foreign exchange in the formal market in July, which cut the spread to about 8% in August. Weak external demand reduced merchandise exports by 10.2% in the first half of 2009 (Figure 3.10.7). Exports of seafood, coffee, crude oil, and wood products, for example, fell by more than 10%. This drop was partly offset by reexports of gold (about 9% of total exports) and an increase in exports of rice. Imports dropped at the much faster rate of 164 Asian Development Outlook 2009 Update 34.1%, reflecting the slowdown of economic activity, lower import prices, 3.10.6 Exchange rates reduced availability of trade credit, and the shortage of foreign exchange. Black market exchange rate A downturn in FDI inflows contributed to the sharp decline in imports Lower bound of the trading band of capital goods. The trade deficit (balance-of-payments basis) narrowed Upper bound of the trading band Reference rate of the State Bank of Viet Nam to $0.2 billion in January–June 2009 from $11.4 billion in the same period Dong/$ of the previous year. Despite declines in remittance inflows and tourism 20,000 income, the current account recorded a surplus of 0.4% of GDP in the 19,000 18,000 first half of 2009, compared with a deficit of 23.8% in the same period of 17,000 2008 (Figure 3.10.8). (The first-half current account balance would be a 16,000 deficit of 5.7% of GDP if reexports of gold were excluded.) 15,000 The capital account balance turned from surplus into deficit due to a Jan Apr Jul Oct Jan Apr Jul 2008 09 downturn in FDI inflows and outflows of portfolio investment and short- Sources: State Bank of Viet Nam; staff observations. term capital. The overall balance of payments recorded a deficit, and gross Click here for figure data official reserves fell to $17.6 billion at end-June 2009 from $23.0 billion at end-2008. In terms of import coverage, however, gross official reserves increased to 16.4 weeks of imports at end-June 2009. For the rest of 2009, it is assumed that the Government will not take additional fiscal stimulus measures. It is further assumed that SBV will start tightening monetary policy toward the end of this year, as the balance of risks shifts from growth to macroeconomic stability. Output at new oil fields that came on stream in late 2008 is now expected to reach 3.10.7 Trade indicators its peak in 2009, rather than in 2010. Hence, total oil output is projected Export growth to rise to 16.5 million metric tons in 2009, revised up from March. Import growth Trade balance Based on these assumptions, the GDP growth forecast for 2009 is raised %, year on year 90 $ billion 12 to 4.7% from 4.5% in ADO 2009, mainly a result of the larger than expected 60 8 fiscal stimulus, oil output, and net exports. Growth in the second half is 30 4 forecast to accelerate to 5.4%. Inflation in 2009 is now seen averaging 6.8%, 0 0 above that predicted in March because of stronger than expected inflation -30 -4 inertia as well as higher projections of global commodity prices. The current -60 -8 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 account will return to deficit in the second half as exports shrink further 2007 08 09 and imports pick up. For all 2009, the deficit is likely to be 7.0% of GDP, Sources: State Bank of Viet Nam; staff estimates. revised from 11.5% in view of larger exports of oil and rice, gold reexports, Click here for figure data the sharper decline in imports, and larger GDP than projected in ADO 2009. The overall balance of payments is still expected to record a deficit this year. Prospects Forecasts of 2010’s outcomes are based on the assumption that the 3.10.8 Current account and reserves Government will not adopt additional fiscal stimulus measures next year Current account balance and that SBV will pursue moderately tight monetary policy. It is further Gross oﬃcial reserves $ billion assumed that SBV will eliminate the shortage of foreign exchange through 26 greater flexibility of its reference rate, tighter monetary policy, and increased sales of foreign exchange. The projection for oil production in 2010 is 13 maintained at 15.5 million metric tons, an easing from this year’s level. 0 On this basis, GDP growth is forecast to increase to 6.5% in 2010 (Figure 3.10.9), in line with the ADO 2009 projection. Growth of 2005 06 07 08 H1 08 H1 09 -13 consumption and domestically financed investment will speed up as Note: Reserves exclude the Government’s foreign exchange the 2009 monetary and fiscal stimuli work through the economy. The deposits at the State Bank of Viet Nam and the foreign exchange counterpart of swap operations. anticipated improvement of global financial conditions will bring about Sources: State Bank of Viet Nam; staff estimates. an upturn in foreign-financed investment. At the same time, net exports Click here for figure data of goods and services will fall, with imports growing faster than exports. Southeast Asia Viet Nam 165 The labor market will pick up on the back of accelerating growth, and 3.10.1 Selected economic indicators (%) incomes will increase. Inflation is now forecast at 8.5% next year, revised 2009 2010 up from 5.0%. The reason is the rapid growth of money supply in 2009 ADO Update ADO Update and expected increases in world commodity prices. 2009 2009 The overall fiscal deficit is likely to narrow to about 4.5% of GDP GDP growth 4.5 4.7 6.5 6.5 next year (Figure 3.10.10). The forecast rise in world oil prices (hence oil Inflation 4.0 6.8 5.0 8.5 revenue), faster economic growth, and deferral of some tax payments Current acct. bal. -11.5 -7.0 -9.7 -9.0 from 2009 to 2010 as part of the fiscal stimulus will boost government (share of GDP) receipts. Expenditure will fall because some outlays initially planned Source: Staff estimates. for 2010 are being brought forward to 2009 (also part of the 2009 fiscal stimulus), and no additional fiscal pump priming is expected next year. Viet Nam’s stock of public and publicly guaranteed debt is likely 3.10.9 Growth and inflation to be slightly higher than was forecast in March, at about 46% of GDP GDP Inﬂation in 2010, compared with 48% in 2009 and an estimated 44% in 2008 % % 10 25 (Figure 3.10.11). Since much of the debt is on concessional terms, its 8 20 present value will remain below 20% of GDP. 6 15 The current account deficit is forecast to widen from 7.0% of GDP 4 10 this year to 9.0% in 2010. Stronger external demand and higher prices 2 5 for goods shipped abroad will lift exports, and remittance inflows will 0 0 2005 06 07 08 09 10 increase as economies in source countries improve. However, these factors Forecast will be more than offset by increases in imports resulting from stronger Sources: Asian Development Outlook database; staff economic growth, improved availability of trade credit and foreign estimates. Click here for figure data exchange, and higher import prices. The overall balance of payments should return to surplus if capital inflows rebound as anticipated. Risks to this outlook are mainly on the downside. A weaker than 3.10.10 Fiscal and current account deficits expected global economic recovery would damp growth in Viet Nam, Current account Fiscal and an unexpected spurt in world commodity prices would mean % of GDP higher inflation. A conceivable domestic risk is that inflation pressures 5 and expectations of devaluation could build up to an extent that they 0 significantly reduce demand for dong-denominated assets. In such an -5 event, the black market exchange rate would depreciate sharply and -10 inflation could return to double digits. The current account deficit would -15 be wider than projected in this Update because speculative imports would 2005 06 07 08 09 10 Forecast surge, as they did in the first half of 2008. The resultant macroeconomic Sources: Ministry of Finance; State Bank of Viet Nam; staff turbulence and stabilization measures would likely cause slower economic estimates. growth than forecast in the ADO 2009 Update baseline scenario. Click here for figure data Moving to guard against such an outcome, SBV has started taking measures to keep inflation in check and to damp devaluation expectations. In particular, it has committed to limit growth of banking Public and publicly guaranteed debt 3.10.11 Public and publicly guaranteed debt system credit and total liquidity (M2) to 30% in 2009; asked state-owned % of GDP commercial banks to limit loan growth to 25% in 2009; and urged all 50 commercial banks to tighten credit for consumer spending and purchases of real estate and stocks. It has also committed not to devalue its 40 reference exchange rate in the near future and has increased the supply 30 of foreign exchange in the formal market. As noted, SBV is also likely to start tightening monetary policy toward the end of 2009. It is expected to 2005 06 07 08 09 10 20 pursue moderately tight monetary policy in 2010 to support the dong and Forecast to counter inflation pressures stemming from accelerating growth and Sources: Ministry of Finance of Viet Nam; staff estimates. Click here for figure data rising world commodity prices.
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